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Rating Action:

Moody's Assigns Aa3 Und. and Enh. to Kentucky Community & Technical College System (KY) Bonds; Outlook Stable

06 Mar 2017

New York, March 06, 2017 -- Issue: State Property and Buildings Commision Agency Fund Revenue Bonds, Project No. 116; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $59,035,000; Expected Sale Date: 03/27/2017; Rating Description: Revenue: Public University Broad Pledge;

Issue: State Property and Buildings Commision Agency Fund Revenue Bonds, Project No. 116; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $59,035,000; Expected Sale Date: 03/27/2017; Rating Description: Revenue: Public University Broad Pledge;

Summary Rating Rationale

Moody's Investors Service has assigned Aa3 underlying and Aa3 enhanced ratings to the Kentucky Community and Technical College System's (KCTCS) planned fixed rate $59 million Project 116 Agency Fund Revenue Bonds (maturing 2036) to be issued through the Commonwealth of Kentucky State Property and Buildings Commission (SPBC). Moody's maintains a Aa3 issuer rating, and Aa3 underlying rating and Aa3 enhanced rating based on the Kentucky Public University Intercept Program on the outstanding revenue bonds. Moody's also maintains an A1 rating on the City of Versailles Public Properties, Inc. (KY) First Mortgage Revenue Refunding Bonds Series 2016 (KCTCS Project). The outlook on the underlying and enhanced ratings is stable.

The system's senior-most Aa3 rating reflects its important role as the largest provider of two-year public higher education in the Commonwealth of Kentucky (issuer rating Aa2 stable), diversified among 16 colleges, with a large scope of operations and state operating support providing one-third of operating revenues. Solid financial reserves, as well as a fully funded OPEB plan, also support the rating.

Challenges tempering the rating include rising leverage concurrent with the system's strategic capital investment initiative. The system also faces a competitive student market, resulting in decreasing net tuition revenue, and fiscal 2017 state appropriation cuts that will require close expense oversight. A sizeable pension liability adds uncertainty for future expense pressures.

The A1 rating on the City of Versailles Public Properties, Inc. First Mortgage Revenue Refunding Series 2016 Bonds is a one-notch distinction from the Aa3 issuer rating, reflecting the biennially renewable lease structure, partially mitigated by the essentiality of the property as the system's building headquarters.

Rating Outlook

The stable outlook reflects expectations that the system will budget prudently to generate at least balanced operations and good coverage of the current and near term planned debt, with limited use of financial reserves beyond that currently expected for the BuildSmart initiative.

The stable outlook for the enhanced rating is based on the state's current stable long-term outlook.

Factors that Could Lead to an Upgrade

Underlying rating: Strengthened growth in net tuition revenue and stable state operating support leading to sustained improvements in cash flow and financial reserves; substantial growth of wealth relative to debt

Enhanced rating: Upgrade in the Commonwealth of Kentucky's rating

Factors that Could Lead to a Downgrade

Underlying rating: Erosion of liquidity or narrowed operating cash flow margins (Moody's adjusted) of less than 5%; material debt beyond current planned program

Enhanced rating: Deterioration in credit quality of the Commonwealth of Kentucky or insufficient debt service coverage by interceptable funds

Legal Security

The SPBC Agency Fund Revenue Bonds, Project No. 114 and planned Project No. 116 are secured under a lease between the system and the Kentucky SPBC, and a pledge of KCTCS of its General Receipts to pay its obligations under the lease. The general receipts include student tuition and fees, nongovernmental grants and contracts, sales and services, other operating revenues, state appropriations, and investment income.

The First Mortgage Revenue Refunding Bonds, Series 2016 (currently $3.8 million outstanding) were issued through the City of Versailles Public Properties, Inc. (the corporation). The project is the system's headquarters building, which serves an essential purpose, and further, is required to be located in Versailles. The 2016 bonds are secured by the corporation's interest in a lease agreement between the corporation and KCTCS. The lease agreement renews without affirmative action by KCTCS. The Series 2016 bonds are further secured by a foreclosable first mortgage lien on the building and by a first pledge of the rents and revenues of the corporation. At the end of the initial 20 year lease term, the building will transfer to KCTCS. During the lease term, KCTCS has the option of purchasing the building as mutually agreed by both parties, so long as KCTCS is given budget authority.

The system's existing Project 114 and planned Project 116 Agency Revenue bonds benefit from the presence of a state intercept program. If the system fails to make debt service payments 10 days in advance of the debt service payment date, the Secretary of the Finance and Administration Cabinet of the Commonwealth is obligated to use any funds that have been appropriated to the system but not yet expended to make debt service payments.

Given that KCTCS's General Receipts debt service payments are due October 1 and April 1, and that the payments must be with the trustee 10 days prior to the April 1 quarterly distribution of operating appropriations, we are reasonably assured that sufficient non-distributed, legislatively adopted state appropriations will be available for intercept. Peak periodic debt service coverage is calculated by dividing interceptable state aid available to pay the remaining periodic debt service payments. For KCTCS, this calculation results in an estimated pro forma peak debt service coverage of 4.2 times, which is strong sufficiency.

Use of Proceeds

Proceeds of the Project 116 revenue bonds, the second of three related bond tranches, will be used for campus building or renovation projects among its 16 campuses. The current issue is expected to fund projects at 14 campuses and to pay costs of issuance.

Obligor Profile

The Kentucky Community and Technical College System was created in 1997 to consolidate Kentucky's two-year postsecondary and technical colleges. KCTCS is comprised of 16 colleges across the state, with curriculum offered at 70 campuses. In fiscal 2016, the system recorded operating revenue of $522 million and in fall 2016, enrolled 47,180 degree and non-degree seeking students.

Methodology

The principal methodology used in the underlying rating was Community College Revenue-Backed Debt published in June 2016. An additional methodology used in the underlying rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mary Cooney
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eva Bogaty
Additional Contact
Higher Education
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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